by Shares dropped on Monday as the US Dollar remained strong. Investors are getting ready for the Federal Reserve’s announcement of the interest rate on Wednesday. It is likely the Feds increase the rates by a jumbo size, and it would resonate throughout the world.
The US Expects a Jumbo Rate
The markets have priced in a 75 basis points interest rate increment from the US Federal Reserve while stocks show a 20% possibility of a 100 basis points increment. They equally show a real possibility that the rates might get as high as 4.5% in the Federal Reserve’s effort to control inflation.
Invesco’s David Chao said the performance of assets while the Feds tighten monetary policies is different from what happens normally in the event of other interest rate increments.
Monday experienced thin trading as the markets were closed in Britain for the Queen’s funeral. But the STOXX trading index in Europe fell by 0.5% to the lowest point it would be in two months as it was pulled down by stocks in the tech sector.
S&P 500 shares dropped by 0.67% and Nasdaq, on the other hand, dropped by 0.83%.
As the market waits for the rate increment, it would also be expecting the Federal Reserve’s plot expectation for the new rates. The rates are expected to be hawkish and it would put the rate at about 4.25% when the year ends and more than that by next year.
Fluctuating Stock Prices
The risk of the rate increment has seen the 2-year Treasury bond yields increase by thirty basis points in the past week just to then land at 3.92%, the highest level it would be at since 2007. That has made stock prices quite expensive when compared and it took the S&P 500 lower by close to 5% on the week.
Britain and Japan are on public holidays, so Treasuries are not trading. But the Eurozone interest rate went higher as short-term yields went not too far from their heights.
Interest rates are not rising in the US alone. A lot of central banks meeting later this week are expected to increase their rates on borrowing. Note that there is a division in the market on if the Bank of England will eventually increase rates by 50 basis points or 75 basis points.
The central bank in China, on its part, reduced rates by 10 basis points to aid its suffering economy. Japan might be the other exception as it shows no sign of dropping its policy in spite of the Yen’s slide.
